Gini Dietrich

Are We Nearing a Tech Bubble Burst?

By: Gini Dietrich | May 8, 2012 | 
48

Is anyone else concerned we’re very close to another tech bubble burst? It’s normal that history repeats itself, but it usually happens with generations who don’t remember the first time around.

In Chicago, we don’t have to look far to begin this conversation. A little more than a year ago Groupon was offered $6 billion from Google (an offer they turned down in order to go public, which they did less than a year later). At the time, I predicted they would falter and never see that kind of money again.

I didn’t make this prediction because I have some crystal ball that tells me what’s going to happen and gives me winning lottery numbers. I made it because I was reminded of what happened during the dot com bubble.

We just watched Facebook buy Instagram for $1 billion (a year’s worth of profits) and insane valuation numbers being thrown ($96 billion) around as Facebook prepares for their road show.

This is a lot of money for companies that don’t make money (excluding Facebook, who has figured out the profit game). I’m reminded of 1999, when venture capitalists were paying big money for great ideas and lots of eyeballs, but companies without business plans or a way to make money.

During an event I attended last week, Carol Roth reminded the audience a company is worth what just one person will pay for it. Hence, Instagram was worth $1 billion to Facebook because they clearly have something the giant social network does not.

And Chris Dixon says no good VC firms invest in companies with the idea they’re going to flip them. He says this is a bad strategy and they’re much better off investing in companies that have a good chance to build a very profitable business.

But is this enough? Did we learn our lesson from just 12 short years ago? Or are we quickly careening toward another mistake that could have been prevented by studying history, setting aside our egos, and forgetting about greed?

About Gini Dietrich


Gini Dietrich is the founder and CEO of Arment Dietrich, an integrated marketing communications firm. She is the author of Spin Sucks, co-author of Marketing in the Round, and co-host of Inside PR. She also is the lead blogger at Spin Sucks and is the founder of Spin Sucks Pro.

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48 Comments on "Are We Nearing a Tech Bubble Burst?"

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HowieSPM
4 years 1 month ago
The Facebook investors and Facebook owners are using a Pump and Dump business model. Ride the hype then sell out. That is what Russian Mafia, Chinese Mafia and Jewish Mafia (Goldman) do. Chris Dixon is right. Normally the owners make their money during the IPO including the VCs. But in this case the investors bought inflated parts of Facebook looking to flip it making Zuckie a billionaire. This is the prime driver of the bubble. Everything is being compared to Facebook and thus inflated. And Zuckerberg and Sanberg (I know you like her she is evil to me) have guns… Read more »
ginidietrich
ginidietrich
4 years 1 month ago

 @HowieSPM I can see the valuation in Facebook…at least they’re making money. But paying $1B for a company that doesn’t make any money? That’s the sign of a bubble.

3HatsComm
4 years 1 month ago
Well, it’s not a real $1 billion now is it? It’s $300 million plus stock swap; were Facebook to eventually pull a Groupon, the numbers would look a little different. See also: AOL/TimeWarner or many of Google’s acquisitions. Net worth was lost on paper, in the market. It hurts, but IDK.. it’s not like those stacks of hundreds just walked out from under the mattress.   And I think that’s the problem when not making ‘stuff’: virtual money. So much of the dots bombed b/c it was all virtual, nothing substantive. Read yesterday about how much market cap Groupon is… Read more »
wabbitoid
4 years 1 month ago

 @3HatsComm Sooner or later, people will have to make stuff in this nation, yes.  In the last 20 years our accumulated trade deficit is about $7.8 trillion.  We have an economy based on printing US Dollars and sending them overseas for gizmos and oil.  It will not last forever, and may be in its last throes right now.
This “virtual money” is just part of a  bigger problem that is in the process of correcting itself, IMHO.

JMattHicks
4 years 1 month ago
 @wabbitoid  @3HatsComm First and foremost, I’m 100% on board with the sentiment you expressed in regards to the deficit and shipping jobs overseas. I’ve told my wife that if we ever are able to afford some ridiculous luxury vehicle (she wants a BMW one day), I’m still going with something domestic (well, as domestic as it can be as I’m not sure any vehicles are 100% made in America…). I’m a patriotic guy, and I’ll do all I can to keep as much of my money in America as I can.   That said, the money being exchanged is very, very real.… Read more »
3HatsComm
4 years 1 month ago
 @JMattHicks  @wabbitoid I shared a post a while back – long list of all the “Americana” stuff we buy and none of it made it the U.S. Levis? No. American girls dolls? Not so much. The biggest ‘American’ beer company is now Sam Adams; but then again, so what if InBev owns Budweiser – if they’re still hiring, paying people in the US? Or the KIAs made here in Georgia? And yes, I’d love some of the monopoly money these companies have to be sitting in my bank account. Back to valuations, it’s got to be tied to products/services people want, pay… Read more »
ginidietrich
ginidietrich
4 years 1 month ago

 @3HatsComm In 2001, there were 427 companies that went public and nearly half of them doubled in price the day they went public. In 2002, less than 100 companies went public and none of them doubled in price. I also found FB is valued at $96B (as of Friday, when I wrote this blog post). The stuff that concerns me is the greed around pumping up a company in order for its founders to become gazillionnaires, without thinking about what it does for the greater good. I rarely agree with @HowieSPM , but I do on this.

wonderoftech
4 years 1 month ago
Hi Gini,   You make a good point that the last Internet bubble burst a short time ago, yet in spite of that, tech companies have flourished again. Many tech companies have either risen from the ashes or been started new since then.   During that time, the worldwide economy has been changed drastically, with very few areas experiencing significant growth other than tech. Howie has a good point, Main Street wants a winner and with 800 billion users, Facebook certainly appears to be a winner.    Twitter also has had huge success, but like Facebook, has struggled with transforming… Read more »
ginidietrich
ginidietrich
4 years 1 month ago

 @wonderoftech I actually think Facebook is one of the few that will make it after they go public. They know how to make money. But Groupon isn’t going to last much longer, Instagram was just bought for $1B, and Twitter can’t figure out how to monetize themselves. I think we’re teetering on a very close edge.

bdorman264
4 years 1 month ago

It all sounds like silly numbers to me, but is eerily similar to the first go around for tech and also similar to real estate to a lesser degree. You can only go so high……
 
Unlike @wonderoftech @3HatsComm and @HowieSPM this is all I have to offer on the subject. 

HowieSPM
4 years 1 month ago

 @bdorman264  @wonderoftech  @3HatsComm all your money is invested in Facebook Bill. I can tell.

bdorman264
4 years 1 month ago

 @HowieSPM  My Space and Blockbuster actually; I think I will hold them awhile longer………….

HowieSPM
4 years 1 month ago

 @bdorman264  @wonderoftech  @3HatsComm bill when you have 2000pts you get a Rays bat signed by @JMattHicks and @jennalanger 

ginidietrich
ginidietrich
4 years 1 month ago

 @bdorman264  That’s kind of a lot for you!

TheJackB
4 years 1 month ago

Sometimes grown ups remind me of really young children who think that if they cover their eyes no one can see them.
 
It is cute when a three year-old does it, less so when it happens with “older people.”

ginidietrich
ginidietrich
4 years 1 month ago

 @TheJackB That’s a VERY good analogy!

TaraGeissinger
TaraGeissinger
4 years 1 month ago

I think it’s a legitimate concern considering how many of these buzz-worthy companies don’t actually make any money. Like a previous poster said, it’s like the real estate market. In my area (SW Florida) the bubble was HUGE. I feel very much that an Instagram valuation of $1bil is a similar type of crazy.

ginidietrich
ginidietrich
4 years 1 month ago

 @TaraGeissinger I LOVE seeing you around the web! And you’re right…I’m totally cool with paying money for companies that are making money.

Bzarbock
4 years 1 month ago
It maybe naive but I don’t think another bubble burst is possible now. The first go round there was an infatuation with the internet, it was new, endless and full of unending possibilities that lead everyone to believe fortune was just a click away. However online business has become more standardized and for better or worse internet business has been heavily regulated. I think there is life after Facebook and it is a matter of time before its shares rot away to myspace value but I don’t think that because a select few are obviously over valued it signals the coming of some grand financial collapse… Read more »
ginidietrich
ginidietrich
4 years 1 month ago

 @Bzarbock I think the infatuation is back. I don’t think it will be as devastating at the dot com bubble, but this is what happened in 1999 and 2000: People paid crazy amounts of money for companies that had no business plans and weren’t making any money. And it’s happening again.

EugeneFarber
4 years 1 month ago

After reading some articles about the valuation of Pinterest I got really worried. Why do we even need to look back at the last tech bubble? How about the real estate bubble that basically JUST happened? Yes, the industry is obviously different, but the lessons are the same – unfortunately people tend to be very short sighted and excitable. 

ginidietrich
ginidietrich
4 years 1 month ago

 @EugeneFarber Great point about the real estate bubble…I can’t talk about it. It’s too close. 

lfredsouthwick
lfredsouthwick
4 years 1 month ago

Yeah, this is something I’ve thought about, too. For what it’s worth, I emailed a guy whose economics blog I read and asked his thoughts on it, because I don’t have much chops in the ways of economics. He said that it looks like there is a bubble, especially given that companies like Instagram, as Gini said, don’t even have a revenue model and are getting bought out for $1 billion.
 
So, people who know more than I do say ‘yes.’ How and when it pops? That’s tough to tell and he couldn’t really predict it. We shall see.

ginidietrich
ginidietrich
4 years 1 month ago

 @lfredsouthwick How and when it pops is a really great question. We do have to just sit here and wait and see.

wabbitoid
4 years 1 month ago
I think what’s going on is a reflection of the secular bear market that we’re in (and will be through at least 2017 if history is a guide).  I call it the “Hollywood Effect”.   The market is ruled by fear, not greed right now.  Everything looks risky.  The market makers are looking for the one sure “blockbuster”  – the “Transformers XX” that is like money in the bank.  And when they think they have it, the flight of money into it is insane.   That may well continue for a long time as long as it’s only a select… Read more »
ginidietrich
ginidietrich
4 years 1 month ago

 @wabbitoid I don’t think it is selective right now. Based on conversations I’ve been having with multiple friends in Silicon Valley, it’s happening again. “We’ll invest in you because we like your idea.” That’s VERY scary business.

ladylaff
ladylaff
4 years 1 month ago
Having also been there in the late 90s, one thing I’ll say for this bubble is that it’s made of slightly thicker soap.  Some of those dot.com businesses in the 90s were seriously flimsy and you didn’t even bother asking to see the business plan because you just knew what the young Swedish Harvard grad in the black mock turtleneck was going to tell you, or worse, doodle on a cocktail napkin.  This time, the business plans are there but I think many are based on shaky foundations.  As in the dot.com boom I  think tech startups in this boom… Read more »
ginidietrich
ginidietrich
4 years 1 month ago

 @ladylaff What?! We have day jobs??
 
I’m with you – I think the soap is thicker, but we both lived it…it’s happening again.

JMattHicks
4 years 1 month ago
I’m still a rookie in the Silicon Valley/Bay Area, and though I’ve spent what’s rapidly approaching two years working for a start-up, I’m still wet behind the ears as far as venture capital, valuations, acquisitions, etc. go.   With that said, I’ll give my two cents on this issue:   The bubble will never burst. @Bzarbock made a great point about the internet: 15 years ago 99% of Americans could live their lives just fine without ever getting on the internet. Was it nice to dial into AOL, Freewwweb, etc. to instant message, send an e-mail to one of the 7… Read more »
HowieSPM
4 years 1 month ago
 @JMattHicks  @Bzarbock  @ladylaff great comment Jeremy. Coming from the finance side of things the ‘bubble’ is valuations, stock pricing, and vc investment/dealmaking’ these will burst. It happened in Housing recently. Commodities are boom and bust. When it busts some people get mega rich most lose money. and they lick their wounds and wait for the next big thing.   So in 2002 it is possible Livefyre never would of found any funding and today they can. And if you go public before the bubble bursting have access to raise capital in ways you can’t today.   But if you view the bubble… Read more »
JMattHicks
4 years 1 month ago
 @HowieSPM  @Bzarbock  @ladylaff I agree about the pricing/valuations 100% changing (but not bursting), which I alluded to in regards to companies like “Draw Something”, but obviously did a terrible job of clearly communicating.   I don’t think we’ll see the price bubble burst and stock prices, valuations, etc. (if the “Facebook of mobile banking”, in regards to impact on the world/industry, pops up in 5,10, or 15 years, it will still be valued incredibly high) leave the astronomical realm, I do think we’ll see fewer and fewer companies reaching that point until we’ve reached a point that the market has leaned itself out.… Read more »
HowieSPM
4 years 1 month ago
 @JMattHicks  @Bzarbock  @ladylaff The dotcom and housing had very similar influences. Dot.com had day trading. people quit their jobs to trade stocks all day and the market rose for 5 years so no one failed. And then companies were considered winners based on how fast they burned cash. Once the market popped housing took off, And those day traders and average person jumped into home became realtors etc. At the peak there was 1.1 million homes for sale and 1 million registered real estate agents in California. I mean how can you live selling 1 house a year. I remember zero down… Read more »
JMattHicks
4 years 1 month ago
 @HowieSPM  @Bzarbock  @ladylaff But are stocks jumping in the same manner as they were then? Sure, Google is trading high, but would you say they’re overvalued? And I don’t think we’re seeing the same kinds of problems following this surge in tech valuations. What’s happening today (aside from large valuations) that happened 15 years ago?   Facebook, LinkedIn, etc. are viable companies with viable products with a very far (even 1B eyeballs for FB) reach. What price do you put on being the biggest network in the US, India, South America, Europe, and (eventually) China? How do you even gauge something like that,… Read more »
Andrea T. H. W.
4 years 1 month ago
When the only thing that matters is making quick, big and easy money probably memory fades away quickly. Anyway sorry for Carol Roth but a company is worth depending on how much money it has in the bank, the rest is like playing dice at Vegas. You can sell a valuable idea but if it doesn’t transform into something real then you’re throwing money in the bin.   But it will be very interesting to see how much people will pay for FB quotes during the IPO and how much they will be valued after one year, my prediction is… Read more »
ginidietrich
ginidietrich
4 years 1 month ago

 @Andrea T. H. W. OMG! I totally forgot the world is ending this year! NEVER MIND! I’m going to the beach to wait out the rest of my days.

GeeklessTech
GeeklessTech
4 years 1 month ago

Right now the climate is mild compared to .com era.  Back then just having .com in the company name seem to qualify you to go public.  It was too easy and everyone was playing the game, then then door slammed shut.  While I think there maybe some overvaluation, the froth reached back in 2000 was off the charts.  It was la la land.  Groupon would have been $150 stock by now in 1999-2000, even though at $10.19 GRPN looks way too high.  

ginidietrich
ginidietrich
4 years 1 month ago

 @GeeklessTech I agree with you…and to @ladylaff ‘s point, the soap is thicker this time around. But I still see some things that are way too similar to 12 years ago.

Craig McBreen
4 years 1 month ago

When I first heard that “Yelp” was going public I thought, oh no, here we go again 😉 
 
But this is nothing like 1999-2002. I’m thinking Webvan, Pets.com, and the big boys like WorldCom, etc. What an insane time that was!

rustyspeidel
rustyspeidel
4 years 1 month ago

 @Craig McBreen Why not?
 

ginidietrich
ginidietrich
4 years 1 month ago

 @Craig McBreen I dont think it’s the same thing as 12 years ago, but I do think we’re seeing a lot of the same mistakes as then. I mean, paying $1B for a company that doesn’t make money? I wish I could get in on that deal.

geoffliving
geoffliving
4 years 1 month ago

I have to say yes, we are. The Instagram acquisition is clearly out of hand, and until Facebook monetizes it and proves us different with $1 billion plus interest in ad profits on Instagram, I won’t agree with any pundits who think the purchase was worthwhile.

ginidietrich
ginidietrich
4 years 1 month ago

 @geoffliving I can’t believe ANYONE thinks that purchase was worthwhile.

jenzings
jenzings
4 years 1 month ago
I’m probably alone in this, but I think it’s not going to be so much a tech bubble burst as it is a social media tech bubble burst. But it will be much smaller than the dotcom bubble deflation.   Basically, social networks are worth money based on the presence of people and engagement. If companies can’t find a way to effectively monetize the sites (without annoying the users) AND if companies continue to flail about with social media campaigns that don’t measure or measure the wrong things, or have no long-term objectives then there will be a problem. Sites… Read more »
ginidietrich
ginidietrich
4 years 1 month ago

 @jenzings You’re exactly right – it used to be about eyeballs and now it’s about followers and fans and viewers. Ancillary businesses are popping up, just like they did during the dot com era. You used to pay $100K for a website. Now you can get one for $1K. Creating a business around a trend like this is a very bad idea.

NateStPierre
4 years 1 month ago
I know this is a really, really simplistic way to look at it, but I think this round is gonna burst too. Jut looking around, people continue to pay obscene amounts of money for companies, products and platforms that don’t make any. And half the startup mentality is to just make something catchy to get buzz to get investment to put more money into it to get more buzz to get bigger investments to make a bigger product to get snapped up by a giant. It works for some (hello, Instagram), but I can’t help but wonder where all that… Read more »
rdopping
rdopping
4 years 1 month ago
Hey Gini, what do you want for SpinSucks? I value it at $10billion. Top that Zuckerberg!   Maybe all the dudes invloved in the last burst are gone and the new dudes haven’t learned anything from them. Hopefully the financial sector can impart some knowledge and show us that if you shuffle money around and around in circles you are not really creating value.   I am sure there is some rediculous value statement that justifies the $10billion I am willing to pay for SpinSucks…..er, sorry slipped out of reality there for a sec, value statement that Zuckerberg paid for… Read more »
hackmanj
4 years 1 month ago
I don’t think we’re lined up for another tech bubble like the prior one. In the last bubble we were pouring money into businesses via their publicly traded stock that weren’t even profitable with the expectation that they would be. If anything the companies that are far ahead and paying ridiculous amounts of money to get talent, strategic positions and suppress competition actually have viable business models and are churning out profits. Right now it is private investors that are taking the risk and they are winning some and losing others but I don’t think that has implications on the average person or… Read more »
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